City Developments - RHB Invest 2019-02-22: Recurring Income To Soften Challenging Year

City Developments - Recurring Income To Soften Challenging Year

Maintain NEUTRAL and Target Price of SGD 9.20, 3% downside.

4Q/FY18 results broadly met. In 4Q18, CITY DEVELOPMENTS LIMITED (SGX:C09) recorded impairment losses of SGD94.1m for its hotel portfolio (mainly from the US market) and made provisions of SGD20.1m for two small-scale development projects in the UK.

While City Developments' share price has rebounded by 17% since the start of the year, we believe that this rally is not sustainable considering the challenging outlook for the Singapore (SG) and UK residential markets as well as hotel portfolio.

On the upside, City Developments has been steadily building-up its recurring income portfolio, which should help mitigate earnings volatility. While valuations are reasonably attractive with the stock trading at 38% discount to our RNAV estimates, we do not see any strong near term catalyst.

Remains cautiously optimistic on SG residential demand.

In 1H19, City Developments is expected to launch three projects – Boulevard 88, Amber Park and Haus on Handy, with two more likely in 2H19. Management expects a good take up for the projects due to attractive location attributes.

Based on our observation, while buying demand remains, buyers have become more selective and price sensitive post cooling measures. Thus margins are likely to be compressed in high single digits for its recent land acquisitions.

PPS-1 likely to be rolled over for another two years.

City Developments addressed market concerns on Profit Participation Securities (PPS) -1, whose tenure is set to expire on Dec 2019. The PPS-1 comprises of SGD1.5bn of Sentosa assets comprising of W Residences and W hotel. With the challenging residential outlook, the company is currently planning to extend the tenure of the residential portion of PPS-1 by another two years by refinancing the debt and is exploring sale opportunities for W hotel.

For PPS-2, it has already sold Manulife Centre and is on advanced negotiations to sell 7&9 Tampines Grande. It has acquired the remaining 60% stake in Central mall (office tower) and plans to revamp and reposition the asset.

Fund management platform – working on USD5bn target by 2023.

City Developments acquired two Grade A assets in London for £568m in 2018, as a part of its fund management growth strategy. The assets are currently under-rented with attractive yields of (~4.75 - 5%) and could potentially be injected as seed assets into a REIT platform or property fund.

Management plans to accelerate growth of fund management segment via M&A of listed and unlisted platforms, with a focus on its existing markets.

Hotel portfolio – in transition.

The revamped London Mayfair hotel is expected to open in 2Q19.

Key focus for 2019 will be on restoring profitability for its New York hotels. It would also be pumping in additional capex to renovate several of its large hotels to remain competitive.

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